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Greek debt crisis: High stakes game of financial chicken

The European Union is pushing Greece into deep economic reforms as a way to end the Greek debt crisis and stabilize the weakening euro.

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Reassured markets?

EU leaders hoped the announcement of an "in principal" commitment to help Greece would reassure markets and buy time for German leaders to convince their constituents that a bailout for Greece is necessary. In early afternoon trading the euro fell to $1.348, close to a nine-month low.

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“The announcement by the heads of state [in February] was a powerful one,” said Thomas Klau of the European Council on Foreign Relations in Paris. “That Germany would change this and go back on its word is unthinkable in European politics."

“I think the strategy is not to let Greece off the hook too soon," Mr. Klau said. "The German prime minister and finance minister are ready for reform … but whether junior ministers are ready to embark on what will be a wrenching cultural change, it is not so sure.”

Greek Prime Minister George Papandreou has come up with a plan to shave his budget deficit by freezing wages, raising the retirement age, curbing bonuses, and raising taxes. But whether he can cut four percent from the current 12.7 percent budget deficit -- currently four times the eurozone limit -- is questionable. The EU has set a March 16 deadline for Greece to show progress in cutting the deficit.

Merkel took a tough love line yesterday, telling German radio that, "we have a [European] treaty under which there is no possibility of paying to bailout states in difficulty."

Yet other members of the eurozone are expecting France and Germany to relent, perhaps once it is the euro, and not the Greek nation, that needs saving. The Wall Street Journal report said that state-owned banks in Germany and France might buy Greek bonds before the end of the week to stabilize markets.

David Deddouche, a currency specialist at the French bank Societe Generale, argues that he does not see the euro falling to parity with the dollar, as other analysts have predicted.

But he admits that the current unprecedented crisis will require concerted action to avoid a euro collapse: “Conceiving a zone with a common currency and independent political and fiscal sovereignties was revolutionary. Worse, there is not in Europe, for the moment, a clear plan of crisis management in public finances. This uncertainty is weighing hugely on the euro,” Mr. Deddouche said.

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